* $21-per-share price is 41 percent premium to Tuesday'sclose
* Signet shares rise more than 13 percent
By Phil Wahba
Feb 19 (Reuters) - Signet Jewelers Ltd on Wednesdaysaid it would buy smaller rival Zale Corp for about $690million in a deal that would strengthen its hold on the U.S.specialty jewelry sector and let it tap new markets.
The deal, which would combine the two largest U.S. mid-tierjewelry chains, Zales and Signet's Kay Jewelers, is valued at$21 per share. That is a premium of about 41 percent to Zale'sclose on the New York Stock Exchange on Tuesday.
"It unlocks new sources of growth," Signet Chief ExecutiveOfficer Michael Barnes said on a conference call.
The deal caps a multiyear turnaround for Zale, which in 2010faced a liquidity crisis. The company's stock, which had tradedas low as $3.76 in April, rose to $20.87 in early trading onWednesday, while Signet was up 13.5 percent at $90.00.
In the United States, the companies would have a combined 16percent share of the specialty jewelry market, which is highlyfragmented, according to IBISWorld data.
Zale in 2010 faced a liquidity crisis after sales plummetedbut has rebounded since then. In July, it reported its firstprofitable year since the 2008 financial crisis, and it recentlyannounced strong sales for the 2013 holiday season.
Besides its namesake chain, Zale operates the successfulPeoples Jewellers chain in Canada and is established in thegrowing outlets business.
Signet's British chains, H. Samuel and Ernest Jones, havebeen a drag on the company's sales.
The companies said that combining their operations wouldgenerate about $100 million annually in savings.
Zale will become a division of Signet. Zale CEO Theo Killionwill manage that division after the deal, but will report toSignet CEO Barnes.
Including debt, the all-cash deal values Zale at about $1.4billion, the companies said.
Signet said it had the support of private equity firm GoldenGate Capital, which owns about 22 percent of Zale. Golden Gatein 2010 gave a Zale a lifeline with a $150 million secured loan,in a deal that also gave it warrants to buy 11 million sharesfor $2 each.
Signet said it expected the deal to increase earnings by ahigh single-digit percentage rate, excluding acquisition costs,in the first year after closing.
The company said it expected to finance the transactionthrough bank debt, other debt financing and converting asignificant portion of its accounts receivables into cash.
Signet said J.P. Morgan Chase Bank had committed toprovide bridge financing for the transaction. J.P. MorganSecurities acted as financial adviser to Signet, while Weil,Gotshal & Manges was legal counsel.
Bank of America Merrill Lynch was financial adviserto Zale, and Cravath, Swaine & Moore acted as legal counsel.
